Tele2 suggests room for lower prices on Dutch market

Monday 15 December 2014 | 16:03 CET | Background

Tele2 is activating its LTE network in the Netherlands. The roll-out will occur in clusters, to ensure customers don't lose coverage as they move around. Tele2's own employees will be the first to have access, creating around 1,000 'ambassadors' for the service, followed in Q1 2015 by Tele2 customers in the Randstad. The operator expects to have near-national coverage by Q1 2016, although there will still be a number of white spots in sparsely populated areas. The company is keeping quiet on its pricing until the first customers are migrated to the network. It's clear already though that it will not differentiate by region, despite the cluster-based approach. Tele2 will take its lessons from the Swedish market, as much as possible, to apply to the Dutch market. Its target remains to reach eventually a 20 percent market share. 'Unlimited data' and a dual-brand strategy are not for the moment part of the plan, but lower prices will feature in its offer.

With all its focus on the mobile market, it's clear that the fixed market is currently not a core activity. Even not in the Netherlands, where Tele2 has a bigger position on the fixed market than in other countries. Developing the strategy on this market will follow at a later time. The company is not ruling out further European expansion, suggesting the group could be in the running for the various operators thought up for sale at the moment (Belgium, UK, France, Spain, Switzerland). Currently the focus though is on turning Tele2 Netherlands from a MVNO to a MNO.

'Netherlands 4 years behind Sweden'

The most important figure from Tele2's Capital Markets Day on 12 December was 1,800 MB per month. That is the average data consumption of a Swedish smartphone/tablet user and already 70 percent of that mobile data runs over LTE. Tele2 estimates the Netherlands, at an average 350 MB per month, is around four years behind Sweden. That's how long it took Sweden to grow to the current level, but of course the question is whether it will take so long in the Netherlands, especially with the increasingly popular use of streaming video services (Netflix, YouTube etc).

This creates a chance for Tele2 on the Dutch market, combined with the country's high smartphone penetration and especially, in Tele2's eyes at least, the high level of prices. The company pointed to research by Telecompaper on mobile prices in 16 European countries this past summer. The report shows that the Netherlands is in line with the European median score for Sim-only plans. Tele2 however chose to highlight the plan options where there was a significant difference with the rest of Europe (2 GB and up to 1,000 minutes).

It's still a secret how much Tele2 will undercut the current prices, but the figures presented by the company suggest it has significant room - even if this is somewhat doubtful. A discount will be needed to reach its very ambitious target of a 20 percent market share, as the competition will surely follow Tele2's price cuts. Small players are also targeting the data market with low prices. Given the types of subscription Tele2 is proposing, the operator could better target heavy users and value-added services. An alliance with a streaming video provider would be a likely choice, like its cooperation in Sweden with Viaplay.

Network equality is still uncertain and can't yet be used as a differentiating factor. With fewer sites, it will be difficult to match KPN's coverage, which was already national in early 2013. Increasing the network density may be the next step, once Tele2 reaches near-national coverage in Q1 2016. Until then, quality will be a challenge for the operator.

An interesting figure is how much Tele2 expects to save on costs by moving from a MVNO to a MNO model: direct costs are estimated to fall 85 percent. Tele2 was already included in our European price comparison, and if Tele2 thinks it can lower prices, then this will be the result of migrating customers to its own network. Furthermore, Tele2 has a strong balance sheet and can absorb the start-up losses. CEO Jeff Dodds noted as well that the operator's LTE budget is not tied to whether the operator succeeds in selling Tele2 Norway to TeliaSonera (see our commentary). Earlier the proceeds were thought to go to developing the Dutch activities.

Lessons from Sweden

Tele2 was a LTE pioneer in Sweden, teaching the operator some early lessons about the business. It has developed a careful strategy of stimulating data usage and expanding 'buckets', without frustrating customers through disproportional price increases. Across the group, Tele2 has been growing service revenues by around 7 percent annually. Part of this is backed by falling costs thanks to the switch to LTE technology, which offers higher spectral efficiency.

As a side note: the operator will deploy fibre in part of its backhaul in order to handle the increased traffic. It's now working towards 40 percent of base stations connected to fibre, and once 5G appears (around 2020), this will increase to 80 percent.

The rest of Tele2's service revenue growth is explained by a simple pricing structure for data usage (buckets). The pricing is based on a number of basic elements:

All plans with a lot or unlimited minutes/SMS also come with data.

Switching to a bigger bucket should give the customer the feeling s/he has better control of his/her costs.

Data traffic is suspended once the cap is reached. Only if customers explicitly say they want to use more data is traffic resumed. So no throttling to lower speeds.

Customers do not pay a premium for accessing 4G.

Tele2 stimulates the use of LTE handsets. A 3G smartphone handles an average 1.1 GB per month, while 4G handsets use an average 2.0 GB.

It also offers value-added services, such as access to HBO, Deezer, Viaplay and simpliTV.

The new strategy in Sweden is to drop long contracts and sign up new customers on 30-day plans ('Tele2.0'). It also has a simple plan structure. Unlimited calls, SMS and MMS costs SEK 149 per month (EUR (15.85). Data varies from SEK 49 for 1 GB (EUR 5.20) to SEK 119 for 3 GB (EUR 12.65) and SEK 699 for 60 GB (EUR 74.30).

The result is steadily increasing demand for larger buckets. In Q1 2014, the operator had 62 percent of customers on buckets of 1 GB and 38 percent using 2-20 GB. By Q3 2014, the percentages changed to 47 and 53 percent respectively. The challenge for Tele2 Netherlands will be to find the right balance:

Price is an important instrument, but the bucket strategy implies maintaining pricing power in order to gradually increase prices.

Price is important in building market share, but Tele2 also wants to avoid being seen as a price fighter on the low end of the market. It aims instead for an image as 'value champion', with a good price-quality ratio. Tele2 will not be running price stunts, as price and quality need to go hand in hand in order to be a 'value champion'.

Zero rating, unlimited data, dual brands

When asked, CEO Jeff Dodds appeared interested in offering 'zero rating' for listening to certain music services, as T-Mobile does in the US to stimulate smartphone use and hence data usage. However, the current Dutch net neutrality law prohibits this kind of pricing. Dodds did not say whether the operator will offer a bundle with unlimited data, but this may be justified even if data usage in the Netherlands is still at a relatively low level. A dual-brand strategy, as used in Sweden (Comviq for the low end, Tele2 for the high end), is also not planned for the Netherlands. This would only be considered once the LTE network is at national coverage and the quality is seen in line with the other top brands in the Netherlands.

Tele2 NL's focus is clearly on mobile at the moment. For the group as well, it's mainly a mobile provider. Developing the Dutch strategy on the fixed market is for another day. When asked if the group is interested in entering new markets in Europe, Dodds said that Tele2 is sooner a buyer than a seller. 2015 will be an interesting year indeed.

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